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First-Quarter “Safe-Harbor” Quarterly IRS Estimated Tax Payments: Why and How to Make Them

April 9, 2024 Nancy McClelland Leave a comment

For years, we have stressed the importance to our clients of making quarterly estimated tax payments. And unlike many tax preparers, we also do bookkeeping, accounting, and consulting for our small business owners — so we’ve also encouraged them to have us do a quarter-by-quarter calculation of how much to pay.

There were many reasons for this:
· Making sure the client had their books up-to-date and reconciled for the quarter, so they can be used for real-time managerial decisions;
· Matching the cash flow of a given quarter (or the actual sales and vendor invoices, for accrual-basis clients) to the related tax liability;
· Preventing the common situation of getting to tax-time and having a huge refund or balance due.

However, times have changed. We still want folks to make quarterly payments (see my related IRS & Illinois posts for how to do it online), but for the first quarter, at least, we’re asking everyone to use “safe-harbor” calculations.

Why Use 1Q Safe-Harbor Calculations Instead of Annualizing?

For one, the immense number of changes to our tax code since the Tax Cuts & Jobs Act (TCJA) took effect in 2018 has made tax planning substantially more complex than it used to be. The amount of time it takes to do a “back of the envelope” or “paper napkin” calculation has tripled. (And in case you’re curious — we use tax software and Excel, not used envelopes and paper napkins in our firm. That’s how you know you’re working with a real professional.) Both the effort involved and the cost to the client have increased accordingly.

Relatedly, first-quarter estimated tax payments are due on the same day as personal 1040 and C-Corp 1120 taxes are due. And since our tax-time work is a deeper dive than it used to be, and the estimated tax calculations are more complex as well, there simply isn’t enough time to do a full-on calculation for each and every client that requests it — at least, not if we also want to be well-rested and in good health, so we can do our very best on the remaining annual tax returns.

There’s good news, too, however — the state of Illinois — and many other states, used legislation to create a loophole for getting around a pesky TCJA limitation on the State And Local Tax (SALT) deduction. I won’t explain it all here, but the result is that all of our S-Corp and Partnership (aka “Pass-Through Entity”, or PTE) clients are paying their personal state taxes through the company. This is a very easy and predictable calculation, as Illinois charges a flat tax (not socially progressive, but it certainly is simple) and requires the annual liability to be divided by four and paid evenly across the quarterly deadlines.

(Side note: the deadlines are not actually quarterly. Due to the timing of the federal government’s fiscal year-end and individuals’ calendar year-end, they are skewed such that they’re not even the same number of months per quarter. You would think that of all the government departments that could count properly, it’d be the IRS, but apparently not. The due dates are 4/15, 6/15, 9/15 and 1/15 — though many are better off making the final state tax payment by 12/31.)

As a result, quarterly calculations for the state simply aren’t necessary for the first quarter (possibly even the first three quarters, depending). Given that the states seem to live for assessing penalties and interest for underpayment of estimated taxes (they are wildly aggressive about it), this is the best approach to take.

But it’s not just the states that issue penalties and interest for underpayment of taxes — the IRS does, as well. Much less aggressively, however, and they do still have the notion (that the new Illinois PTE tax law does not) of “annualizing” your quarterly taxes. This means that you presume the amount you made year-to-date is representative of the whole year, and paying quarterly tax based on that projection. It works great for small business owners who have lower income in the first three-quarters of the year and then make most of their profit in the final quarter.

Just to be clear: we still do this for our clients… but we wait until the second or third quarter, and in some unusual cases, we wait until November and then do a thorough analysis of the year thus far. It’s just that there’s little point in running these calculations for the first quarter anymore — it’s almost never representative of the rest of the year, and it places them into a precarious situation where they may end up underpaying by too much and then owing penalties and interest. Or, at the very least, having to pay us at tax-time to fill out the complicated annualization schedule on the tax return. If you want to be more accurate with your calculation, because you expect your income to be substantially higher or lower than last year, then ask to book a May tax-planning session to get squared-up for the 2Q payment, due June 15.

Last, but not least — we’ve decided to have all our clients commit to a monthly bookkeeping and accounting contract with us. Doing annual clean-ups during tax season simply is no longer sustainable (to be honest I’m not sure it ever was, which is one of many reasons so many CPAs are burned out), and isn’t cost-effective. It’s also not fair to our other clients — who are on a monthly schedule — to have to wait in line while we work on those who swing through just once-a-year. And most importantly, we truly believe that all small business owners should be looking at their financial statements regularly to help them make impactful decisions throughout the year — ones that can sometimes be the difference between turning a profit or enduring a loss. And since everyone will be on a monthly schedule, the motivation no longer exists to do quarterly reviews for estimated tax purposes, purely as a way to get clients motivated to catch up on their books.

Where To Find Your Safe-Harbor Amounts and How To Pay Them

If you’re a client of ours, or of pretty much any tax professional out there, calculating safe-harbor quarterly estimates can and should be a part of preparing your annual tax return.

After reviewing and signing your return, your CPA (or EA, JD or non-credentialed preparer) will e-file it, and once it’s accepted by the IRS and state agencies, they will either send over vouchers (which I wouldn’t bother using, because we want to pay taxes online almost every time that’s an option), or a list of required payments — whether that’s in a letter or a little chart form where you can check ’em off. However you get them — put them in your calendar now. Do not rely on your tax preparer to remind you. This is not their job. You are a grown person running your own business, surrounded by technology that is designed for precisely this kind of thing.

While you’re at it, save these links for instructions on how to pay online:
– IRS: How To Pay IRS Quarterly Estimated Taxes Online — Don’t Let Your Checks Get Buried Or Lost In The Mail (msn.com)
– Illinois: How To Make Quarterly Estimated Taxes Online — Illinois IDOR | The Dancing Accountant

And if you’re in a panic and can’t find the amounts, the general rule is that you want to pay 1/4th-ish of your total tax liability for the prior year (a bit higher for some states, such as Illinois). Again, if we do your taxes, you should have already received these totals for 2024, or will be receiving them as soon as your return is finalized.

Frequently Asked Questions

1) What if I have an extension?
Two options here: a) provide your tax preparer all the docs you already have and ask them to do their best to give you an estimate; they can even add that to the amount you’ll need to pay with an extension — which means if your extension payment estimate is short, the 1Q estimate will make up the difference, and either way, you’ll just apply the balance to the current tax year; or, b) go ahead and keep paying the same amount you paid for last year’s quarterly taxes; some payment is better than none.

2) What if I don’t have a tax preparer?
All the DIY tax programs out there can do this, too — they’re not very helpful for the tax planning that we do with our clients for 2Q & 3Q, and certainly not for 4Q — but they do a perfectly fine job with safe-harbor estimates. Alternatively, check out my colleague Hannah Smolinski‘s great YouTube primer on how to calculate estimated taxes.

And since you asked, here’s a fabulous photo of Hannah and me at QuickBooks ConnectFest.

3) What if I can’t afford to pay my quarterly estimates?
Pro tip: Did you know you can break your quarterly payment into smaller chunks? Let’s say you owe $2400 per quarter and you’re worried that you won’t have enough set aside by the time the due date arrives, because it’s so hard not to raid your own savings account when opportunities call. Just go online and pay $800 per month instead. Or $200 per week. It gets tricky with the weird quarterly tax due dates, but you are a smart cookie and can figure out the math. The point is that you don’t have to save it all up and then make the payment. If you have cash on hand, you can go in there now and do it while it’s on your mind, even if it’s a partial payment. Something is better than nothing.

4) What if I forgot to pay for a quarter?
Go in there and make a payment now. The penalties are per day, so the sooner you make up the difference the better.

5) What if I have additional questions about the process?
Throw whatever you can at the quarterly estimates and contact a CPA to help you… after Tax Day. Please be respectful of the plight of tax preparers right now. It will not serve you long-term to try to wedge yourself onto someone’s calendar last-minute: almost all the good ones had a deadline for submitting tax materials weeks ago; we’re all exhausted and likely to make mistakes this time of year if we’re taking on too much and not taking care of ourselves; and you want to start off on a good foot when building a relationship with a trusted advisor. The amount of penalties and interest that will be due if you underpay slightly is not that significant if you’re going to be making up the difference in a month, so just pay what you can and get on-track later.

Now, get yourself online and go make those first-quarter safe-harbor quarterly tax payments, already!

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Education, Illinois, IRS, Tips

How To Download Your IRS Account Transcript to Look Up Your Estimated Tax Payments (Updated Jan 2024)

January 16, 2024 Nancy McClelland Leave a comment

“What is an IRS Account Transcript and Why Do I Need One?”

During the pandemic, we began requiring all clients to submit a copy of their IRS Account Transcript along with their Tax Organizer and other annual tax prep documentation. Initially, this was to confirm the amounts of stimulus payments and child tax credit payments. But what we found was that it was a great way to confirm how much the client paid to the IRS for quarterly estimated taxes — and to make sure we credited the payment to the correct tax year. As such, we now always require a copy of this particular transcript — and wish we’d done so all along! It’s free, reasonably easy, and reliable. In the end, it saves the clients (and us) a load of potential headaches.

It’s important to note that there is more than one type of transcript, and each meets a different need. For example, if you’re trying to prepare a tax return for a prior-year and need a list of all the informational documents filed with the IRS that are associated with your SSN, you’d want a Wage & Income Transcript. For more info on how to do that, and the various types of transcripts out there, please see the comprehensive article I wrote for MSN on the topic.

An Account Transcript lists information on payments and credits posted to your account throughout the year, such as quarterly estimated tax payments. The best news where downloading any transcript is concerned? All you need is a photo ID, a mobile phone with a camera, an email address, and an Internet connection.

Keep in mind that the IRS will not email you a transcript; you must go online and create or log in to your account and download it. There are email scams out there that entice folks to click on a link or attachment with the promise of an IRS Online transcript – don’t fall prey.

“How Can I Download My IRS Transcript?”

1. From the IRS website, you’ll need to create an ID.me account. (This is the most involved of the steps, but thankfully you only have to do it once; moving forward, you’ll simply sign into the same account each time.) The ID.me website uses facial recognition to confirm your identity, so you’ll need your phone to take a selfie.

If you need help creating your ID.me account, the ID.me Help Center spells out the process very clearly. You can also watch this video or review these written instructions if you want to review the process first.

One note: if you were using the old IRS account system, you won’t be able to log in with your previous IRS username and password anymore — the IRS sunsetted that program in early 2023 and now you need to use the ID.me system. At this point, most of our clients already have ID.me set up, but this may be new to you if you’ve never downloaded a transcript before.

2. Once your account is created, log in, go to the IRS’s Get Transcript page and click the “Get Transcript Online” button.

The IRS “Get Transcript Online” starting page

3. Select the reason you need a transcript (it’s fine to just select “Other”).

The IRS “Get Transcript” tool reason-selection screen

4. Leave the Customer File Number blank and click “Go.” The screen will display all four (or five, if you have non-filing years) transcript options and the available years.

IRS “Get Transcript” tool – sample options for available transcripts to download

5. Under “Account Transcript”, click the tax-filing year (the top line of the lower-left box — “2023” in this example).

Make sure you are selecting the right kind of transcript — in this case you want an Account Transcript. For other types of transcripts, please see the comprehensive article I wrote for MSN on the topic.

6. After you select your transcript, like magic, a PDF will pop up in a new tab of your browser with all the information you need. (Or it will say “No record of return filed,” if nothing has posted yet.)

7. Print the file to PDF and save it somewhere safe, along with the rest of your tax season documents.

(And if you want to get deep into the weeds, NASFAA has an amazing “Tax Transcript Decoder” that compares the fields on a tax return to the fields on a tax return transcript, and Saving To Invest had fun with highlighters when creating a legend for each row on an account transcript. Tax nerds unite!)

“What About State Information?“

Each state has its own idiosyncrasies, and many have their own system — but quite a few states are using the same software company, so they often look and act similar. Our firm is located in Chicago, so to get a list of the estimated tax payments you’ve made to the state of Illinois, go to https://mytax.illinois.gov/?link=1040EPy (without logging in) and enter your SSN, Name, and the tax year in question.

If you also made payments from a corporation or partnership, you’ll need to log into your company’s MyTaxIllinois business account to get those.

“Now What Do I Do With These Files?”

Seriously? You make sure to use your accountant’s secure file transfer system to send them your PDFs. Please do not ever email sensitive documents. It puts both you and your CPA at risk.

Done! Let the tax return preparation begin!

Education, IRS, Tips

Doing Your Taxes Last-Minute And Can’t Find Your W-2 or 1099? Download Them For Free From The IRS Website

October 12, 2023 Nancy McClelland Leave a comment

I wrote a fabulously comprehensive article for MSN back in March about the various types of IRS transcripts, what they’re for, why you’d use one versus another, and how to download them. Some of my finest work, if you ask me… but today you don’t care about that. You just need to hurry up and file your tax return by Monday, October 16th, and you can’t find any of the paperwork you carefully saved to your Mac desktop, only to have it be deleted during an update. (Yes, this is a thing. I’ve had it happen to two clients already.)

Whatever the reason for not being able to find your tax documents, you still have to get that return filed by Monday. Lucky for you, most of these documents are listed on what is called a “wage and income transcript”. The beauty of a wage and income transcript is that every one of those documents sent to you – they’re called “information returns” – is also sent to the IRS, with your social security number as a unique identifier. If you download this list of documents from the IRS, you get a summary of everything filed on your behalf.

Can’t find some of your W-2s from working several jobs?
Not sure whether your freelance gig issued a 1099-NEC? Or maybe you lost track of countless different contract work payments?
You’re pretty sure you have an old dividend- or interest-bearing account given to you by your grandparents but can’t ever find the form they mailed?
Do you pay student loan interest, tuition, or mortgage interest and you can’t find the forms because you moved during the year?
No matter how many times you try to download your retirement distribution tax form, something goes wrong with the site?

Though it takes the IRS a few months to post all these to your transcript (or longer, if the issuing company filed an extension), by this point in the season, everything should be there, and you’ll be able to prepare your tax return after all — even if you lost the originals that came in the mail or can’t figure out where you saved the PDFs.

And the best news where downloading a transcript is concerned? All you need is a photo ID, a mobile phone with a camera, an email address, and an Internet connection.

“How Can I Download My IRS Transcript?”

2. Once your account is created, log in, go to the IRS’s Get Transcript page and click the “Get Transcript Online” button.

3. Select the reason you need a transcript (it’s fine to just select “Other”).

4. Leave the Customer File Number blank and click “Go.” The screen will display all four (or five, if you have non-filing years) transcript options and the available years.

5. Under Wage & Income Transcript, select the tax-filing year.

7. Print the file to PDF and save it somewhere safe, along with the rest of your tax season documents.

As explained above, your wage and income transcript will list all forms W-2, 1099, 1098, and 5498 that have been processed by the IRS so far for the tax year in question.

For most taxpayers, that’s all you need. But some people also can’t remember how much they paid in estimated taxes, or if they took last year’s refund and credited it forward, or they need to review last year’s return to jog their memory about this-or-that. If you’re one of those folks — no worries, I got you covered: but you need to read the longer version of this post that I shared back in March.

No need to panic — you got this. Now go file that tax return on time… for 2023, the extension deadline is Monday, October 16th, by midnight in your time zone. Yes, submitting your taxes is nerve-wracking, but it’s way better than the alternative, and with a handy list from the IRS of all your documents in one place, you’re one step ahead of most of the other taxpayers who haven’t filed yet!

Illinois, IRS, Tips

What Does A Tax Extension Mean For You?

April 11, 2023 Nancy McClelland Leave a comment

It’s that time again… Tax Day is upon us and millions of taxpayers will need to have their returns extended for various reasons. What does this mean? The AICPA has released a “Tax Extension FAQ” for CPA members to share with their clients.

What does filing an “extension” do?

• An extension is a form filed with the IRS to request additional time to file your federal tax return. This extends the due date for submitting your individual return to October 15.
• In some states, filing an extension with the IRS will automatically extend the time to complete a state income tax return. My note: In others, you must file a state extension. In still others, you must make a payment as your extension.
• Filing an extension grants you additional time to submit your complete and accurate return, but you still need to estimate whether you will owe any taxes and pay that estimated balance by the original due date.
• Extending your return allows you and your CPA more time to prepare your tax return to ensure the filing of an accurate tax return. In many cases, you may still be waiting for additional information (e.g., Schedules K-1, corrected Forms 1099, etc.) to complete your return.

Why does my CPA suggest we extend my tax return?

• If your CPA has recommended that you file an extension, it may be due to many reasons, such as:
– The volume of data or complexity of certain transactions (e.g., sale of a rental property) on your return requires additional time.
– The amount of time remaining in filing season is limited for the CPA to complete client returns by the due date* due to late-arriving information.
– My note: Your small business accounting file needs to be tied out to source documents and all adjustments booked before we will finalize a return, and there may be delays in this process due to a variety of issues.
• Many CPAs have a “cutoff” or deadline for clients submitting their tax information so they can plan their workload to ensure all client returns and extensions are completed by the due date.
• Your CPA may suggest filing an extension if there are aspects of your return affected by pending guidance or legislation.

Am I more likely to be audited if I extend?

• Extending will NOT increase your likelihood of being audited by the IRS.
• It is better to file an extension than to file a return that is incomplete or that you have not had time to carefully review before signing.

What are the primary benefits of extending my tax return?

• It provides for additional time to file returns without penalty when you are waiting for missing information or tax documents (such as corrected Forms 1099). Just remember that an extension provides additional time to file, but not additional time to pay. Penalties may be assessed if sufficient payment is not remitted with the extension.
• You may qualify for additional retirement planning opportunities or additional time to fund certain types of retirement plans (e.g., SEP IRA).
• It is often less expensive (and easier) to file an extension rather than rushing and possibly needing to amend your return later.

Should I do anything differently if I am filing an extension or “going on extension?”

• No, you still should give your CPA whatever information you have as early as possible or as soon as it becomes available.
• Expect to pay any anticipated taxes owed by the due date.* You still need to submit all available tax information to your CPA promptly so they can determine if you will have a balance due or if you can expect a refund.
• If you are required to make quarterly estimated tax payments, individual first quarter estimated tax payments are due on the same day as annual taxes. Your CPA may recommend that you pay the balance due for last year and your first quarter estimated tax payment for this year with your extension.
• If you are anticipating a large refund, your CPA will likely try to get your extended return completed as soon as possible once all tax information is available. Your CPA may also want to discuss tax planning opportunities with you so that, in future years, you don’t give the IRS an interest-free loan.

My note: I’d like to add that we take filing extensions for our clients very seriously. We collect as much information as we possibly can about the year’s taxable income and deductions, extrapolate based on information from the prior year, and build a complete tax return — filling in estimates where needed. This way, we get as accurate a picture as we can so as to project how much might be owed to the tax agencies. We do our best, although it’s not perfect, and as a result, much more work is involved in putting together an extension than most folks might think.

Our blog post step-by-step on how to make quarterly estimated tax payments online.

Illinois, Tips

How To Make Quarterly Estimated Taxes Online — Illinois IDOR

April 10, 2023 Nancy McClelland Leave a comment

Reminder: Due to a new law, Illinois S-Corp and Partnership owners should generally pay quarterly IL state (not federal) taxes through the business. The post below is about how to pay IL taxes personally; click here for how to make IL business tax payments.

There are multiple options for paying personal quarterly estimated taxes. You can: have your tax preparer create vouchers that you then print and mail with a check; prepare your own vouchers for the IRS and IL DoR; or pay online.

Since March 2020, agencies have had so many challenges with paper-mailed checks and vouchers that we are encouraging everyone to make all tax payments online.

The due dates for estimated quarterly taxes are approximately:
1Q: April 15
2Q: June 15
3Q: September 15
4Q: January 15 — however for state taxes, especially for cash-basis filers and those in states with PTE tax, we recommend making the final payment by December 31st.

If you want to know how to make IRS estimated tax payments, see my recent blog post with step-by-step instructions.

For the Illinois Department of Revenue (IDOR), go to the MyTax Illinois site. If you already have an account for sales taxes or another reason — do not log in, unless you are making business tax payments. Then click the “> Make an IL-1040, IL-1040-ES, or IL-505-I payment” link (see screenshot above).

Next, follow the instructions for making a quarterly estimated tax payment; it will make you enter your personal information (SSN, etc.) and ask you what kind of tax payment you wish to make.

It may require you to enter your driver’s license information or your AGI from a past tax return to confirm identity and get your IL-PIN.

Then it will take you to a Payment Information page.

You’ll want to select “IL-1040 Estimated Payment” and enter your tax year. Make sure it’s for the correct year and quarter — this is very important. The example below is for the fourth quarter of 2021.

Then, enter your payment information and click the Submit button.

It will require you to enter and confirm your email address before clicking OK.

Make sure to print the confirmation screen, even though they will send you an email receipt — every once-in-a-while IDOR fails to push the request through, and the amount is not debited or recorded. If you have the print-screen, you can prove you attempted to pay it on-time and that the mistake was theirs.

It will also include a confirmation code, the date/time of the request, the reporting period and amount, and bank withdrawal information. You can click “Printable Confirmation” or just print the webpage to pdf.

Please make sure to note how much you paid to each agency and on which dates — and let your tax preparer know this information as well. Securely uploading copies of the final confirmation screen to your tax preparer or bookkeeper is a great practice, so they can easily store the info in your file.

And if you use QuickBooks or another bookkeeping program, please make sure to enter the quarter, year, and “estimated tax” so that you or your bookkeeper or accountant or tax preparer can make sure it’s applied to the correct year, and for the right type of tax.

For how to make IRS quarterly tax payments online, see my recent blog post on the topic, for step-by-step instructions.

IRS, Tips

How To Pay IRS Quarterly Estimated Taxes Online — Don’t Let Your Checks Get Buried or Lost In The Mail

April 10, 2023 Nancy McClelland Leave a comment

Since March 2020, the IRS, USPS, and state revenue agencies have had so many challenges with mailed paper checks and vouchers that we strongly encourage everyone to make all tax payments online.

If you want to pay your federal estimated taxes online, the easiest way is to use IRS Direct Pay. Paying online offers confirmation that the payment made it to the agency, reducing the chance of issues down the road, especially if the check is lost in the mail or routed incorrectly in the processing department. It also allows taxpayers to be very clear about what type of tax and tax period are being submitted, again eliminating confusion on the part of the agency and preventing future problems.

Pro Tip: if you have questions about estimated taxes — what they are, whether or not you need to pay them, and how to calculate them — I recommend this great YouTube primer by my colleague, Hannah Smolinski of Clara CFO. It can easily be as much as 20-30% of each freelance check you take home, so get on top of this now… don’t wait until the money’s already been spent.

If you are paying online, I recommend making payments one day before the due dates, as sometimes it takes a day for the agencies’ systems to process payments due to overnight automated workflows. The funds are usually pulled from your bank account the same day or one day later, so there is very little wiggle room. This organization will actually send you reminder emails for each payment!

The great news is that you do not need to have an account with the IRS in order to make payments using Direct Pay.

Internal Revenue Service (IRS)

For the IRS, once you get to the Direct Pay site, select the following options (noted in the screen shot below): 1) the reason for the payment; 2) the form you would be mailing in if you weren’t doing this online; and 3) the year to which the payment should apply. For example, for 1st-quarter 2023 personal estimated taxes, you’d select the following:

Pro Tip: you don’t have to wait until the due date for each quarter to make quarterly estimated tax payments! You can pay as early as you like. And if cash flow is a challenge, a great hack is to take the total tax payments required for the year and make monthly or bi-weekly — or even weekly — payments online. (Another trick is to increase tax withholding from your other sources of income, but not everyone has a W-2 job, and not all retirement companies will do that.)

There are many possible reasons for payment — such as extensions, balances due on a filed return, installment payments, amended returns, and so on. The IRS offers a list in their dropdown. For the purposes of this article, we’re focusing on quarterly estimated tax payments.

IRS “Direct Pay” List of Payment Reasons.

It’s extremely important that you select the correct year for payment. The IRS will levy late penalties and interest if you pick the wrong year, and the amount of time and effort that goes into contacting them and getting payments reapplied to the correct year will often cost more for your tax preparer’s time than filing your return in the first place. So keep in mind that the current year is usually the one you want for estimated tax payments, and a prior year is generally for extensions, balances due, installment payments, amended returns, and most other options. Selecting the correct year and type will ensure that these payments show up properly on your transcript.

Once you click the Continue button, you’ll be prompted to confirm the type of form and the period.

IRS Direct Pay Estimated Tax Payment and year confirmation.

At that point the system will ask you to enter a bunch of info to confirm your identity. The basic idea is to provide them name and address data from a prior-year tax return so that… well, so they know it’s really you. Since IRS Direct Pay works without a login, you will need to verify your identity each time you revisit it. Make sure you enter your name and address exactly as they appear on the tax return you are using for verification. If your name or address have changed, try selecting an earlier year for verification and enter the information from that year. This information does not need to be for the same tax year on which you are making your payment. It can be from as far back as 5 to 6 years ago depending on the time of year.

Once you enter all this information and hit the “Continue” button, it will take you to a screen to enter the payment information — amount, bank account, and email address for confirmation. If you are having issues with the system accepting your information, double-check that you’re entering your name, SSN, date of birth and address exactly as it was on the tax return for the year you selected. The IRS has a Direct Pay troubleshooting page if you have more questions.

Next, you’ll need to agree to the disclosure pop-up.

In the final step, you will need to review all the information you have entered, provide an electronic signature including social security number or ITIN, and check the box to authorize the debit. Click Submit and you are done!

Well… except that you may also have to pay state estimated taxes. See here for my post on how to make personal Illinois estimated tax payments. (But if you have an S-Corp or Partnership, see here instead.)

Many self-employed folks get surprised at tax-time with huge balances due, penalties and interest. Don’t let yourself fall into that trap — make regular payments online and taxes will be a breeze next year.

IRS, Tips

Alert: IRS Sends Incorrect Balance Due Notices on Married Filing Jointly Returns

August 2, 2022 Nancy McClelland Leave a comment

(c) Matthew G. Bisanz, CC BY-SA 3.0 via Wikimedia Commons

After Forbes reported in early July that starting a month earlier, tax professionals had noticed a higher-than-usual volume of CP-14 notices — the type typically issued when a taxpayer has a balance due on their account — the IRS has finally admitted that this is a systemic issue.

In a statement issued last week, the IRS indicated that no immediate action or phone call is needed: Taxpayers who receive a notice but paid the tax they owed in full and on-time (electronically or by check) should not respond to the notice.

However, many taxpayers are scared and confused by letters such as this — and they may not know how to determine whether they did in fact pay their taxes on-time. Maybe the check was lost in the mail; maybe they selected the wrong period or type of payment when using the IRS Direct Pay system; maybe they reported their estimated tax payments inaccurately. Unfortunately, because tax issues can be terrifying, it’s not uncommon to presume the IRS is correct and pay any balance due on a notice.

Never fear — there are solutions. The IRS online transcript service has undergone improvements in the past few years that make it relatively painless to obtain a PDF of all payment and return activity on your account. In fact, due to the number and complexity of governmental aid such as stimulus checks and the advance child tax credit, our CPA firm requires clients to obtain a transcript before we will finalize their return preparation (I’ve written up instructions here). And the IRS Online Account Center also lists other types of useful information taxpayers can access.

But… this all begs the important question: why did this happen?

According to Amber Gray-Fenner at Forbes, “In early June tax professionals on social media started reporting problems with electronic payments made by the taxpayer listed as the spouse on jointly filed returns. Specifically, CP-14 notices were being issued for accounts where an electronic payment was made by a spouse using IRS Direct Pay and the payment was not applied to the balance due on the jointly filed return.”

Accounting Today reported that, “In general, when certain payments are processed, programming does not move the payment to the married filing jointly account when the payment is:

Not electronic and is made by the secondary spouse.
Electronic, is made by the secondary spouse, and posts before the joint return indicator is present to identify the primary taxpayer.
Made by the secondary spouse using the Online Account ‘Make a Payment’ functionality.”

While this does line up with most of the issues tax professionals and their clients are seeing with these CP-14 balance due notices, it doesn’t jibe with our experience in past years. Spouses with separate tax payments have been filing jointly for many years, and the IRS Direct Pay system is not new — yet the number of these erroneous notices is far higher than in previous seasons.

Back to Amber Gray-Fenner at Forbes:

Some tax professionals who have called the IRS’ Practitioner Priority Line (PPL) on behalf of their clients have been told by some IRS representatives that “there is no way of knowing” that the payment is for the jointly filed return and not some other tax debt that is attached to the spouse’s social security number. This is, quite simply, not correct. When making a payment using Direct Pay taxpayers must specify a reason for the payment (balance due, estimated payment, etc.), the tax form to which the payment applies (Form 1040, etc.) and the tax year to which the payment applies.

Screenshot of IRS Direct Pay list of Reasons, by Nancy McClelland, August 2, 2022

If the spouse of a taxpayer makes a Direct Pay payment for a balance due on a Form 1040 for a year that they filed jointly with their spouse (the primary taxpayer on the jointly filed return) there is really no reason that payment should not be automatically and correctly applied.

However, this is what the IRS currently maintains is the source of the problem. Complicating matters, the second bullet above — the one that references the “joint return indicator” — is specifically referring to taxpayers who e-filed and paid on the same day, and the payment was made by the second partner on the return. In this case, if the payment was made and posted to the IRS system before the return was electronically accepted and posted, it sounds like the IRS computers didn’t know that the balance due payment was related to the jointly filed return.

Now that the overburdened and understaffed agency recognizes that this is a systemic issue — after thousands of tax professionals reported it to the IRS Systemic Advocacy Management System (SAMS) — hopefully they will be able to rectify it soon (automatically removing the associated penalties and interest)… and more importantly, prevent it from causing problems next year. The AICPA has mentioned numerous times on their regular Town Hall series that erroneous notices just compound the problems at the IRS. They aren’t just stress-inducing for the client and irritating for their CPAs — they actually further gum up the works at an already struggling government agency. The IRS has as a result, put a temporary hold on certain types of automated notices, but the CP-14 is unfortunately not on the list.

IRS, Site News, Software, Tips

Tax Season Begins Jan 24 — IRS Says to Expect Frustration

January 16, 2022 Nancy McClelland Leave a comment

In an already unprecedented year, the IRS is taking an unprecedented approach toward managing taxpayer expectations, and with good reason: with tax season officially beginning this coming January 24th, the IRS is dealing with a severe lack of staffing — facing workforce headcounts at 1970s levels — and a backlog of tax returns from the past two years. They say to expect frustration this tax season.

The IRS has been dealing with budget shortages for many years now, and Covid forced their mailrooms to close down for months at a time, creating a massive backlog from which they have not yet recovered. Add to that the unbelievable number of new demands placed upon the agency: three rounds of stimulus payments, Employee Retention Credits for both 2020 and 2021, and demands for guidance in an unbelievable number of groundbreaking areas of code… it is certainly understandable that they would not be able to meet taxpayer needs.

So what can taxpayers do to avoid additional problems? Filing electronically with direct deposit, and avoiding a paper tax return — at almost any cost — is more important than ever this year. Additionally, those who received an Economic Impact Payment or an advance Child Tax Credit last year should be especially careful to order an IRS transcript ahead-of-time to confirm these amounts before filing a return. (We are requiring all clients to submit both federal and state transcripts this year, in their own interest.)

Also, keep in mind that by law, the IRS cannot issue a refund involving the Earned Income Tax Credit or Additional Child Tax Credit before mid-February, though eligible people may file their returns beginning on January 24. The law provides this additional time to help the IRS stop fraudulent refunds from being issued.

Due to the Emancipation Day holiday falling on Friday, April 15th, the filing deadline to submit 2021 tax returns or an extension to file is Monday, April 18, 2022. Taxpayers requesting an extension will have until Monday, Oct. 17, 2022, to file (but not an extension to pay; make sure to pay an estimate of tax with your extension).

The IRS did note that if you are still awaiting processing of your 2020 tax return, this should not prevent you from filing a 2021 return — but as a CPA, I’d recommend against that approach, opting instead to file an extension with a payment of any estimated tax due; otherwise, changes from 2020 could affect 2021 and require an amended return.

The American Institute of CPA’s VP of Tax, Ed Karl, has repeatedly shared in AICPA Town Halls and articles that the IRS Commissioner himself testified that during busy season the IRS gets 1500 calls per second — this translates into their only being able to answer 2% of calls. “No, that is not a typo.” The AICPA strongly supports penalty relief measures that are fair, reasonable and practical, and would mitigate the negative effect of the coronavirus on taxpayers and require less contact with the IRS. Such an approach would alleviate the daily struggles that taxpayers, their advisers and the IRS face. Specifically, the AICPA urges Treasury and the IRS to:

Stop compliance actions until the IRS is prepared to devote the necessary resources for a proper and timely resolution of erroneous notices, missing refunds and other matters. At a minimum, stop automatic collections at least for 90 days after the filing deadline.
Align requests for account holds with the time it takes the IRS to process any penalty abatement requests.
Provide taxpayers with targeted relief from underpayment of estimated tax penalty and the late payment penalty.
Offer a COVID-19 reasonable cause relief, similar to the procedures of first-time abatement and generally facilitate the easier adoption of reasonable cause relief.

Those are some solid suggestions for short-term relief — long-term suggestions and more can be found in this excellent AICPA summary. On Friday, the AICPA joined a coalition seeking relief from IRS service challenges, pointing out that “though the pandemic has created unforeseen and prolonged problems for the IRS, taxpayers, and tax professionals, the IRS has not taken reasonable actions to reduce burdens that appear likely to continue into the upcoming tax filing season”.

In the meantime, here are several important dates from Tax Practice Advisor that taxpayers should keep in mind for this year’s filing season:

January 14: IRS Free File opens. Taxpayers can begin filing returns through IRS Free File partners; tax returns will be transmitted to the IRS starting January 24. Many tax software companies also are accepting tax filings in advance.
January 18: Due date for tax year 2021 fourth-quarter estimated tax payments.
January 24: IRS begins 2022 tax season. Individual 2021 tax returns begin being accepted and processing begins.
January 28: Earned Income Tax Credit Awareness Day to raise awareness of valuable tax credits available to many people – including the option to use prior-year income to qualify.
April 18: Due date to file 2021 tax return or request extension and pay tax owed.
April 19: Due date to file 2021 tax return or request extension and pay tax owed for those who live in MA or ME due to Patriots’ Day holiday.
October 17: Due date to file for those requesting an extension on their 2021 tax returns.

Best of luck — and please remember to be kind and patient with your tax preparer and agency representatives. We’re all human beings struggling with an imperfect system during a difficult time.

Education, Illinois, Software, Tips

How To Make IL Dept Of Rev (IDOR) Business Tax Payments Online: Estimates & Extensions – UPDATED

December 31, 2021 Nancy McClelland Leave a comment

The step-by-step instructions I painstakingly wrote up earlier this year for making business replacement income tax estimated and extension payments are now out-of-date, because IDOR revamped their MyTaxIllinois website in September (grrrrr). So here are the basic instructions (screenshots are coming soon, but this will have to do for now):

— Log into the business’s My Tax IL account
— On the ‘Summary’ tab, look for the ‘Business Income Tax’ section
— Click on the link for ‘View more account options’

There are two ways to do it from here; the first is:
— In the ‘Account Options’ section, click the link for ‘Make An Estimated Payment’
— Select the period you want to pay (which is 12/31/2021 for tax year 2021 — choose a later period if paying estimated taxes for 2022)
— Click the first ‘Add Payment’ hyperlink in the Payment Schedule table for each payment you would like to schedule.
— If your payment information is saved in MyTax Illinois, then in the ‘Choose’ tab you can select the dropdown under ‘Payment Channel’
— Otherwise, select ‘New’ and enter your company bank info.
— In either case, on the right where it says ‘Payment’, you can change the payment’s debit date and enter the amount.
— Click Submit, and re-enter your password for security purposes

Alternatively:
— In the ‘Periods and Submissions’ section, click the link for ‘View Account Periods’
— Click the 12/31/2021 link so that your payment is applied to tax year 2021 (or a later period if paying 2022 estimated quarterly taxes)
— In the upper right corner of this page, click the ‘Make A Payment’ link
— Select the ‘Bank Account Debit’ link
— Click the IL-1120-ST Payment link (ST denotes a “Small Business” payment)
— Enter the amount you want to pay in the Amount and Confirm Amount fields
— Click Submit, and re-enter your password for security purposes

Congrats, you did it!

Illinois, Tips

How To Pay Illinois Dept Of Revenue (IDOR) Individual Tax Extension Payments Online

May 14, 2021 Nancy McClelland Leave a comment

The key to making extension payments online with the Illinois Department of Revenue is that — for non-business payments — there is no registration or login needed. In fact, you should make sure NOT to log in using the business credentials you might otherwise use for sales taxes or business income taxes.

Instead, simply go to MyTax Illinois, do NOT sign in, and click the button that says “Make an Individual Income Tax payment”. (See screen shot above.)

It will walk you through the Non-Login Payment screens, starting with the following:

Make sure to enter your SSN (not your business EIN), and then click the “Look up my IL-PIN” blue link to the right of the field. It will take you to a verification screen:

When you re-enter your SSN here and select one of the options, it only takes a few moments for the system to return a PIN number that you should copy and enter onto the previous screen. (Pro tip: if you’re using Adjusted Gross Income, use Line 1 from your most recently-filed Illinois tax return — it’s easier to find than AGI from your Federal return, and that way you know it will match Illinois’ records.)

On the next screen, enter the payment type:

In this case, since you’re filing an extension, you want the “IL-505-I Payment”.

(The other options are for quarterly estimated tax payments — IL-1040 Estimated Payment — or for a balance-due with your actual annual state income tax return — IL-1040 Payment. Since this is for an extension, you’ll pick the final one.)

Then you’ll select the tax year for the extension:

Lastly, you’ll enter bank information, payment amount, and date of payment.

Click “Submit” and PRINT/SAVE A COPY OF THE CONFIRMATION PAGE. I know they’ll email this to you, but every once-in-a-while something goes wrong, and it’s good to have proof that you attempted paying on-time.

While you’re at it, send a copy of that confirmation page to your dedicated accountant!

Accounting Services for Small Businesses